Take a pass on CGI Group, says CIBC Capital Markets

CGI Group (CGI Group Stock Quote, News, Chart TSX:GIB.A) has slid in the few days since its latest quarterly report, and even as the IT company met expectations in its Q3, the stock remains a “Hold” according to CIBC Capital Markets analyst Stephanie  Price.

CGI’s share price is down two per cent since the company released its third quarter financials on July 31, which featured revenues of $3.12 billion, a seven per cent year-over-year uptick, and net earnings of $309.4 million, also a seven per cent increase from a year ago. Adjusted earnings excluding non-recurring items came in at $337.2 million or $1.22 per share, up from $309.7 million a year ago.

Analysts were expecting revenue of $3.15 billion and earnings of $1.22 per share. Even with the recent dip in share price, the stock remains up 20 per cent year-to-date.

In the quarterly earnings call on August 5, Price asked CGI management about the company’s contract pipeline, where bookings grew by $2.95 billion over its Q3 to a total backlog of $22.42 billion. CGI president and CEO George D. Schindler said the strength is coming from IT modernization across a number of sectors.

“You mentioned long-term, end-to-end contract pipeline is trending up. I think you mentioned over 20 per cent year-over-year. Can you talk a bit about the verticals that you’re seeing the most end-to-end demand in?” said Price, who is Director of Institutional Equity Research & Software and Business Services Research Analyst for CIBC.

“We’re seeing two things,” replied Schindler. “As we move into the middle innings, if you will, of this digitization effort, there are some trailing industries —I would say utilities, government, manufacturing, insurance. And we’re seeing them kind of just jump into the middle innings and doing some of this IT modernization very rapidly but then also introducing in that digitization on top of it. So those are the industries we see as the strongest.”

CIBC has a “Hold rating on CGI Group

On July 26, Price maintained her “Hold” rating on GIB.A, with a 12-month target price of $106.00, which represented a return of 5.4 per cent at the time of publication.

According to TipRanks, a website that tracks the actions of equity analysts, there are currently five “Buys” three “Holds” and zero “Sells” on CGI Group. The average price target of the street is (C) $111.83. The high target is of $120.00 and the low target is C$105.00.

In the meantime, CGI keeps closing contracts. On July 30th the company announced that its subsidiary CGI Federal was awarded a decade long $222.9-million contract with the Naval Information Warfare Systems Command (NAVWAR)—formerly known as the Space and Naval War Systems Command (SPAWAR)—Program Executive Office for Enterprise Information Systems.

CGI will develop and electronic procurement system it says will standardize the process of managing grants, construction, services and supplies. The company says the goal is to deliver an enterprise-wide contract writing and management system it says will be faster and more efficient.

CGI Federal President Tim Hurlenaus said the company was looking forward collaborating with Navy personnel on the project.

At press time, shares of CGI Group were down 1.09 per cent to $99.44.